Canadian Pacific Railway CEO Hunter Harrison opens up about overhaul

Hunter Harrison took over as chief executive of Canadian Pacific Railway Ltd. at the end of June following a bitter proxy battle waged by Bill Ackman’s Pershing Square Capital Management L.P. He spoke to the Financial Post ahead of the company’s investor meeting in New York this week to outline his plans for restructuring the railway, which appeared in a published report Wednesday morning.

This is an edited excerpt of some of that discussion:

Q: Where do you see the biggest cut-cutting measures coming from?

A: Longer, heavier trains, the terminal concentration, and I guess, the best way to say it is, the right-sizing or cost take out of streamlining the operation and cutting through the bureaucracy and the raw headcount coming down.

Q: It looks like you’re looking at cutting about 23%, or 4,500 individuals, from the workforce over four years.

A: Yeah, it’s close. It’s hard to get to what the workforce is because of all of the various definitions of an active, full-time employee, if you will. But we put out about 19,000 paychecks. That includes contractors and consultants and employees of all grades. If you take that number, and you take the 4,500 number plus, we’re going to get somewhere in the 22%-to-23% or 27%-to-28% range.

Q: When you took over, and you got a good look at the organization, relative to CN, did you just see it as a bloated structure? Is that where a lot of the cost was, and why was it so top-heavy?

A: Yes. I don’t know if I can answer that. There’s some degree of it being a cultural issue. To some degree, there’s was lack of a sense of real urgency. You know, headquarters and the top sort of sets the tone for the rest of the organization and it was clear to me that you could walk through headquarters for three or four days and see that there were opportunities there. It is turning out to be the case. Having said that, let me qualify that with this one thing, because people tend to get this wrong because there’s going to be a sensitivity whenever anybody talks about headcount. Number one, if you look at attrition numbers over the four years, it would take out cumulatively over the four years somewhere around 5,700 or 5,800 people. If you could match it, attrition would fit. The match is not going to always fit. But we have said internally we’re not going to lose good people if they want to work. If where they are now doesn’t fit necessarily, we’ve said, “If you’re willing to be cross-trained, trained in another discipline, and you’re mobile and able to move, you’ve got a job.” If you’re stuck in some area, and you won’t move, and you don’t want to do anything but what you’re doing and you don’t want to be trained, you’re probably going to have look somewhere else to work.

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Q: It looks like an outcome of cutting out this bureaucratic structure is that you get a closer relationship with the customer. Also, it looks like some of the structural changes you’re looking at are providing faster service as well.

A: Contrary to popular belief, and contrary to all the press reports during the [proxy battle], I have sat down with customers that represent over 50% of the business now and every one of those dialogues has been good and they’ve all been in a cooperative spirit. I have numerous meetings now to sit down with customers, in a cooperative, collaborative effort to try to improve cycle times and those things that help both of us. From that standpoint, it’s going good. The first thing we did, in the most competitive business we have, we took a day out in the intermodal schedule between Vancouver and Toronto and Vancouver and Chicago, which is huge when you go from fifth morning to fourth morning. Structurally, the best way to describe it is, we have had a huge customer service department of about 650 people. You show me a group that has a customer service department of 650 and I’ll show somebody who’s got bad service. So, what we said is those aren’t the important people. The people we need to get impassioned about service is the people on the ground who are providing the service. So rather than have this huge bureaucracy where if something goes wrong in Toronto and the person is next door to the operating personnel, rather than have the customer call Winnipeg to create a lot of bureaucracy and take a week to get back to the customer, what we’re doing is trying to produce a passion about service with everybody on the ground and recognize the commitments we got to do and that’s where our customer service department is going to be – on the ground. If those people don’t provide the kind of customer service we say we’re going to do, then we’re going to have somebody else do it.

We’ve got to do more with less out there. It’s going back to the basics

Q: I’ve heard the criticism in the past that CP was quite accommodating to customers when there was conflict. Is that true?

A: Extremely accommodating. And you have to if you’re not providing the service. Then when someone calls, and they’re threatening, [you think], “Oh, no, we’re going to lose the business.” And look, we’ll miss some business. Customers, when you go through these changes, it’s like a honeymoon for them. They come running to you and say, “Ok, you gotta give us a cut in rates, or we’re taking the business somewhere else.” Well, I’m sorry, you’re going to have just take it somewhere else because we’re building a product with some integrity and we’re putting it on the shelf and we’re hoping you buy it. But we’re not going to be held up to ransom. If you decide to go to Brand X, you’ll just have to go to Brand X… We’re not going to buy any business. We’re going to buy our business through service and hopefully a competitive price. All the dialogue I’ve had with customers, which doesn’t fit with the other things I’d read about, they’re ready to be a part of that. They know the value. We’re setting records out of Vancouver now, along with our competition in a cooperative effort, moving more grain than has ever been moved.

We’ve got to do more with less out there. It’s going back to the basics. You know, the ABCs of just providing the product. Do what you say you’re going to do, and do it efficiently.

Q: The federal government is expected to table some legislation this fall stemming from the Rail Freight Service Review. What do you think about the possibility of greater regulations?

A: I think this country right now, and I mean Canada, has the best rail service today than it ever has in its history, and I don’t think that anyone who knows anything about rail would dispute that. So, I think some of this has gotten camouflaged and covered up issues more about rates than service. It’s not about service, I don’t think. I thought the Dinning report, overall on balance, was pretty fair. I think there are probably going to be some things they think they have to fine tune. But I would suggest to them if you have a winning combination that is going pretty well, I’d be careful with fooling with it too much… The problem is, and I’ll give you an example, if you have a 100-mile line out there, everybody on the line segment wants to be served at a different time of the day, and you’ve only got enough business from one. How are you going to make everyone happy? I don’t know what they’re planning on doing, but I think there is enough positive that I read now and in the interactions I have with shippers that is good, that I think that overall, if you talk to them individually, they’re pretty happy. Maybe if you talk to their lobbying units, they’re not. But I don’t lay awake at night worrying about that.

I think they’re going to be very mature and handle this in an appropriate way. I have some confidence.

We’re getting out of the downtown. Two reasons: I think it helps the culture and it saves us money

Q: How much of a thorn in the side is the pension issue for you?

A: It’s not as big of a thorn in CP’s side, maybe, as other people have presented it. Is it a concern? Is it high cost? Yes. But, we’re doing a lot of things internally to help us manage that pension plan to the degree that management has some impact on it. We’re focusing on that. If you’ve got less people, in the long run, you’re not going to have as much exposure. I think there’s some legislative things other people have been working on in the interest of a lot of folks in Canada given where markets have been for the last three or four years. That is very crippling for pension plans. I’m convinced we’re going to get some changes as a result of the collective bargaining agreements. We have signed up, and that last two or three groups agree that it is not a collective bargaining issue and that it’s a pension committee issue. I think, and some people would argue here, that there will potentially be some changes in Ottawa that deals with this.

Q: Tell me about the decision for the headquarters. Why did you decide on the Ogden yard?

A: We’re getting out of the downtown. Two reasons: I think it helps the culture and it saves us money. It’s going to save us about $17-million or $18-million annually, and I think over time, it’s a better environment for the employees. If you go into Calgary right now, I hear from the employees, you pay $25 a day to park downtown. The occupancy rate is about 97% or something. Plus the fact, we’re going to put first class quarters there, although they’re not going to look as high and have glass towers. It’s going to be much more functional and nicer for the employees to work in. Workout centres and an outdoor track. It’s going to a first-class place. We’re sort of attaching it to an existing foundation that was already there. But it was an underutilized asset that we were never going to get much out of because we had abandoned shops out there. It’s a way to take those people out of headquarters and kind of let them be out there and see what the business is all about. It’s not about downtown bank buildings and glass towers. It’s about railroading, and they can look out and see track and interface with the people who run the railroad. I think it helps the culture and saves us $18-million.

I think we’re going to be all in there by first quarter of 2014.

Q: So, what timeframe are you looking for to appoint a potential successor? Did you say by midyear?

A: Yeah, I would hope. But if we don’t get it done, we’re not going to go out and make a foolish decision. But when the right person comes along, under the right circumstances, we’ll do that. I would hope that it would be next year.

Q: Are you looking both externally and internally?

A: Yeah. Both. But it’s a pretty limited market out there. If you look at how many railroads, you got. Does it have to be a railroader? No, but you got to think that would be a big advantage for one. With the internal candidates, and we’ve had a lot of churning at the top already, it’s not a list of 100 we have to go through.

Q: More like a handful?

A: Maybe somewhere between a handful and a hundred.

Q: Have you reached out to Keith Creel [CN chief operating officer] yet?

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